Peter Reith

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Wednesday, 10 December 2014

Gas and the Efficient Structure of the Australian Economy
Deakin Policy Forum with APPEA
Wed Dec 10th at PwC Southbank
Many thanks for the invitation to be here today from Deakin University, my respected friend Prof Michael Porter and David Byers of APPEA.
I am only here today because I was invited by then Victorian Premier Ted Baillieu to chair the Victorian Gas Market Taskforce. But I am glad I took on the task and I remain interested because the future of this industry is very important and I like the challenge of what seems to be an impossible task, especially in Victoria and probably NSW.
Despite the noise generated by the greens movement and their allies, the gas industry is safe, great for reducing emissions, plays a useful role for wind power and can offer jobs and investment to lift living standards. The challenge for the industry is a political one; not as tough a challenge as selling the GST but difficult all the same.
Needless to say the resource States of WA and Queensland have clear views on the industry and Australia is fortunate in what they have achieved already with more coming especially in Queensland.
SA is a resource State and it has a pro-resources Minister for Energy who is also SA Treasurer. SA’s economy has been under pressure for many years and as time rolls on, the State becomes more desperate for economic opportunities. Under these circumstances, it is surprising that the Liberal party has joined with the Greens in the SA Upper House to convene an inquiry into the gas industry. It’s not as if the gas industry or fracturing or other aspects of the industry are new in anyway. It’s not as if the science of the industry is not well known. And let’s face it; the Greens would only be involved in this inquiry to further their opposition to any fossil fuels. One of the first lessons I learnt from Queensland is that if you want a gas industry then governments have to make it clear that they support the industry. Why a Liberal party wants to join with the greens contrary to the interests of SA is hard to believe. And why the Liberals would countenance the loss of jobs and investment desperately needed in SA is also hard to believe. It’s a case of giving the greens an inch and they will take a mile. There is no way that the greens will accept the science on coal seam gas and I hope the Liberals have the political stomach to stand up against the greens and publicly provide bipartisan support for the industry with the SA Labor government.
The situation in Victoria is even more barren; Victorian parties have a bipartisan policy of opposing the gas industry. The new Labor government will do nothing to support the gas industry and I expect that they will keep the moratoriums first put in place by Minister Michael O’Brien MP then made even worse by Minister Russell North with the encouragement of Peter Ryan MP in the dying days of the Napthine government. Victoria stands totally opposed to any exploration on-shore; this blanket opposition must be one of the world’s most anti-resources policy ever seen in Australia and probably internationally. It is an embarrassment to rational policy making. In the recent election the Coalition’s junior partner, the Nationals have lost the seat of Shepparton, and nearly lost the Gippsland seat of Morwell. The Nationals leader Peter Ryan has resigned and we do not yet know if the Nationals will remain in bed with the greens under new Leader Peter Walsh as was the case with Ryan. Likewise, former Premier Denis Napthine has stood aside for a new Liberal leader in Matthew Guy. Napthine has announced he will stay in the parliament and presumably will continue to oppose gas jobs and investment in Victoria. Why the Nationals are so tied to the Greens at the expense of farming communities that could do with significant revenue from gas and the chance to make their farms immune to drought, is a mystery. In the recent Victorian election, in Gippsland East the Nats had a primary vote of 60.7%, in Gippsland South Peter Ryan got 57.69% and 66% (TPP) and in Narracan the Liberal vote was 55.7% and 61.8 (TPP). The Greens vote in these three seats was between 9.48% and 7.69%. The Nationals are losing support as demonstrated in Shepparton. Now is certainly the time for the gas industry to press the Coalition to reconsider their policy. The Coalition claims to support the manufacturing sector and yet manufacturing is under costs pressures and an on-shore gas industry could be a huge a fillip to Victoria if only the Coalition could grasp the opportunity next time it is back in government.
As for NSW, it faces the biggest immediate risks of days without gas and a long term prospect of gas prices higher than needed to be. The odd thing is that “Uncapped CSG reserves in NSW could partially ease medium term east coast gas pressures if current planning impediments are addressed urgently” (Energy White Paper – Issues Paper December 2013).
Twelve months later, little has been done to protect NSW from likely gas shortages although at least the new Premier, Mike Baird, has said he wants to access NSW gas reserves ( Baird: “Do we want coal seam gas? Absolutely we do”)(Daily Telegraph 8 Nov 2014). As at today, my fingers are crossed that Premier Baird will stick to his commitment after the forthcoming election.
But before getting excited at the prospects of NSW finally taking on Alan Jones and the greens, I think I will wait until after the forthcoming election and then see if the Premier matches his public statements.
In the meantime, on the 13th November 2014, the Baird government announced its Gas Plan for the regulation of the coal seam gas industry. The report implements the recommendations of the report by Prof Mary O’Kane.
I do not have a final view on the plan but there are a number of matters which need further discussion.
The plan to hand over regulation of coal seam gas to the NSW EPA seems at odds with a desire to support the industry. The EPA has a clear environmental mandate. But it has no mandate to do anything to support the industry. It has no resources for the tasks of managing the industry and it seems odd to bypass the expertise within the NSW mining department. At first glance, it seems the government has decided to wipe its hands of the industry altogether and flick pass all responsibility to the EPA which is statutorily independent of government. Even if the government says it supports the industry the EPA could effectively close gas projects at a whim. It could soon develop a recipe to blanket the industry with more and more regulation and interminable delays. Abandoning the industry makes no sense and to my knowledge handing the industry to the EPA has not been tried anywhere else in Australia.
In my report for the Victorian government, the first recommendation was that the Government must make it clear that it supports the industry. When they refused to accept that recommendation, I knew that the prospect of a Victorian on-shore industry was finished. I don’t see why any company willing to assist NSW with its gas shortage would want to proceed to secure the necessary approvals to get gas to Sydney when the government is not prepared to back the private enterprise effort to supply gas. No support from the government means no gas for Sydney.
I do not agree that NSW should be buying gas from WA. Firstly, because I don’t think that NSW should be rewarded by the Commonwealth for the failure of NSW to access the significant resources within NSW, particularly in the Pillaga scrubs in northern NSW. Secondly, gas from places as far away as WA will be much more expensive simply by virtue of the need to build a pipe and the cost of transporting the gas.
Other proposals make me wonder what the NSW is really intending. One recommendation says that the gas companies have to demonstrate how projects will benefit NSW consumers. That is sort of ok but the Government’s constant failures to confront Alan Jones and others has been a big part of the problem and whilst business has a role to play, the Plan makes no mention of government’s responsibility to engage in public debate and provide the reasons for government support.
My third big concern is the plan to extinguish petroleum exploration licences. And petroleum titles and applications will be reduced to cover 15% of the State – a reduction from 75%. This looks like a ploy to temper green campaigns at the expense of less competition and less prospects of securing new resources. In the immediate future I would surmise that in practice the only gas companies left will be AGL with their project in Gloucester and Santos at Pilliga. Lessening competition is not healthy and should not be the policy position of a free enterprise government.
There is another scenario. If I was running a gas business and constantly being blocked by the EPA then maybe shareholders might ask “why are we risking our capital when we could make more with less risk elsewhere?” And then my hypothetical gas company might take the rational decision to shut down its project and wait for a government that really wants to promote gas. In that scenario, the NSW government would be stranded with businesses going broke, workers losing their jobs and the companies holding the upper hand.
Compare the NSW approach to what happens in the US; it is enough to make you wonder what sort of free enterprise values determines the policy of the NSW government. It certainly suggests that NSW needs to think a lot more carefully about its plans and provide a lot more detail to allow the gas industry the opportunity to decide whether they should be involved in NSW at all.

Tuesday, 9 December 2014

The Prime Minister Tony Abbott and the Treasurer Joe Hockey missed the opportunity in last week's statement on the National Accounts to spell out the need for more cuts.

And the weekend announcement to change the paid parental leave (PPL) is just tinkering: instead the government should drop the PPL, drop the company tax increase that goes with it and stop making claims such as saying the economy will be better next year.

The truth is that commodity prices are falling, unemployment and youth unemployment are going in the wrong direction, the latest GDP figures are not good and many families are feeling the pinch of falling living standards.

I doubt Abbott will ever see a budget surplus in his time as PM. It is not his fault that Labor in government went on a spending spree and commodity prices have tanked. But it is his job to manage the politics and put the economy back onto a sustainable course. Needless to say, the opposition are enthusiastic spoilers but the buck stops with the PM.

First and foremost, the Australian public voted for Tony Abbott to clean up Labor's economic mess. And if he does not give it his best shot then he will be putting his political future at risk. It is as simple as that and if his May 2015 budget is not right then the government is asking for trouble.

Abbott's election commitments to stop the boats and abolish the carbon and mining taxes were all good policies but they were never enough to build an economic platform for future political success, which can only ever be underpinned by a strong economy. As of today, the proposed white papers on tax, federal state relations and the Productivity Commission report on labour market reform could produce a way ahead but it's hard to see the government being bold enough on any of these issues.

Abbott does not have many options. He could claim he has done better than Labor and, given the reality of the most difficult Senate since 1975, now all he can do is soldier on; a recipe for slow political death. Another approach might be to accept Labor's claim that there is no problem: a recipe for a Labor win in 2016. The third option is to go harder and make fiscal reform his No. 1 priority and, if necessary, put the government's future on the line.

The third option is preferable because it is in the country's best interest. We cannot go on living beyond our means. The other two options will leave Australia weaker, poorer and vulnerable to recession; not a record any PM wants on his CV.

He should start by going much stronger on explaining the collapse in commodity prices and the risks of higher unemployment and falling family incomes if we don't get a grip on the budget.

Abbott should not be telling people that all is going to be rosy; many people are saving because they don't believe politicians anyway. Nor should the government in the upcoming mid-year economic and fiscal outlook (MYEFO) announce some Keynesian spending. The best way to boost confidence is to demonstrate that the government knows what needs to be done and it will pursue its objectives without flinching.

A fillip would be to use the MYEFO to finally dump spending commitments already announced by Abbott. He should scrap the $20 billion medical fund, the PPL and slash the $50 billion infrastructure spending, which is a state responsibility anyway.

He then needs a strategy based on good policy and an economic plan. He needs a plan that will put him a long way ahead of Bill Shorten. He needs to set the pace. Abbott could mirror the policy contest at the tail end of the recession "we had to have" in 1991-93. Fightback unveiled such a comprehensive economic plan that then PM Paul Keating was forced to counter it with matching income tax cuts but no GST.

After the election, Keating's claim was revealed as a broken promise because the tax cuts could not be afforded. The saga was a huge blow to Keating's credibility and helped pave the way for Howard's win in 1996. The lesson for Abbott is that the Coalition's internal fortitude eventually played a key role in winning the battle of ideas even though we lost one election along the way.

Abbott has had a year of achievement in many endeavours but with the exception of the three trade deals, his economic management has been bogged down by an irresponsible Senate. To meet the challenges facing Australia today he needs a bigger plan, a clearer message and a willingness to take a punt based on the public interest.

Tuesday, 2 December 2014

Months ago, it was obvious that not only the Victorian Coalition government was heading to defeat but also, three federal seats could easily be lost in the next federal election. After Saturday's defeat, the federal coalition could be facing the loss of even more seats and the prospect of a one-term government.

State MPs are entitled to be unhappy with Prime Minister Tony Abbott. Earlier in the year, Abbott delayed decisions until the Senate rerun. But when it came to looking after the Victorian Liberals before a state election he didn't cut them any slack. He pushed ahead with an increase of fuel tax and cuts to the ABC, having promised pre-election there would be none, when obviously he could have held back for a few days until after Saturday's vote. Less obvious but I think it's important to note, despite the quality of Victorian federal ministers like Andrew Robb and Greg Hunt, Victorians are well aware that at the federal level their MPs do not have the clout they had in the past.

Despite the fact that some voters will link federal and state issues, forget about blaming Tony Abbott. Certainly he was no help, but the Victorians under Denis Napthine were more than capable of losing government all on their own. The Liberals should have been miles ahead of a Socialist Left Opposition Leader. Daniel Andrews' big policies were to have a public holiday for the Friday before the AFL Grand Final and building 50 level train crossings to improve traffic congestion. On top of that he is committed to abandoning the plan to fix Melbourne's traffic congestion, tearing up the contract, raising serious concerns about sovereign risk and giving free rein to his friends in the CFMEU [Construction, Forestry, Mining and Engineering Union]. If you can't beat a manifesto as bad as that in a first term, then don't expect much sympathy.

The core problem with the Victorian Liberals is that they don't know what they stand for. It was so bad at one stage that Labor announced the sale of the Melbourne port and Premier Denis Napthine opposed it. He should have pinched Labor's policy and got on with road infrastructure like the East West Link. Sadly we have seen the slow transformation of the Victorian Liberals from being the jewel in the federal Liberal's crown, to a party with little political commitment other than status quo delivery of services.

Yes, they did a reasonable job in fixing the budget and the East West is a good project but I reckon that fixing the roads is bread and butter for state governments.

Fundamental aspects of the way the Liberal Party works in Victoria needs to be re-examined. For example, the party effectively abused its own rules that require the use of plebiscites to allow local people to decide who is preselected. If the party can't attract members, it will end up as a clique of political insiders.

Basic policy differences between the federal liberals and the state party are quite obvious. If ever there were an example of what was wrong, it was how the party dealt with John Roskam who was a candidate for former Premier Ted Baillieu's seat of Hawthorn. Roskam has probably been one of the strongest advocates of Liberal values in Victoria. In his preselection he was attacked for supporting Section 18C of the Racial Discrimination Act and freedom of speech. He was described as an extremist because he said that the minimum wage was too high. And then he was attacked because in supporting the federal government, he did not support Napthine giving $24 million to SPC Ardmona. To me, that said it all.

Another problem was the Liberals gave too much to the National Party. Nat Leader Peter Ryan's handling of the police portfolio was one of the government's early headaches. The Liberals should never have agreed to having a business welfare fund let alone give it to the Nats to manage. Now the Nats have probably lost the seat of Shepparton and party status. Instead of supporting gas exploration and the potential of jobs and investment in eastern Victoria, the Nats abandoned the interests of local people to appease inner Melbourne greenies.

Communication was very average from Victorian Libs. The standard approach to difficult issues under Ted Baillieu and Dennis Napthine was to instruct ministers to say nothing and hope issues would fade. So instead of pushing for a Royal Commission into the billions of dollars lost in the state's desalination plant the government did nothing.

The bottom line is that if voters can't see much difference between the political parties then no one should be surprised when they chop and change the government. This was the big underlying cause of the Victorian government's loss. The challenge now for federal Liberals as well as the two key players in the state parliament, Matthew Guy and Michael O'Brien, is to work together to fix the glaring problems now fully exposed in the 2014 election.

Tuesday, 25 November 2014

The possibility that Labor might win next weekend's Victorian election is more worrisome than usual. There are two aspects which could set an unhealthy precedent for Victoria and maybe later for NSW Labor – which has a former union boss as its leader who will be contesting next year's NSW election.

The first is the CFMEU's control over Victorian Labor and its record of intimidation, thuggery and links to unsavoury individuals. With Labor using its numbers in the Senate to protect the unions and the CFMEU running Victoria, no one should be in any doubt that union militancy could be difficult to handle. We have had this problem before in the 1970s and 1980s when militant union behaviour was a major concern of key trading partners like the Japanese and Koreans.

The second is the declared policy of Victorian Labor leader Daniel Andrews to tear up large infrastructure contracts. A government decision to refuse to honour legally enforceable contracts is clearly a case of sovereign risk.

Regardless of the fact that polls suggest Labor is just ahead I still find it hard to believe that the Victorian Coalition will lose. The idea that Labor is going to win seems contrary to common sense. Then again, I never thought that Jeff Kennett was going to lose either back in 1999.

Premier Denis Napthine is a good man: the polls show he is well liked by the electorate; he has been a solid and dedicated Premier. There have been no real scandals despite the determination of many in the media to find some; he has sensibly managed the State's finances and wisely promoted Michael O'Brien as Treasurer; his infrastructure proposals will be good for Victoria and his key Ministers are streets ahead of Labor's union hacks.

In contrast, it's hard to see what Labor offers and its record when last in office was poor. Victorian taxpayers will be paying for Labor's mothballed desalination plant for decades, Labor's main policy seems to be 50 railway crossings to improve traffic and Andrews is the most left wing leader Labor has ever put up in Victoria. Andrews was anointed by the hard line CFMEU and he now turns a blind eye to the ongoing thuggery and intimidation which is the well-known trade mark of his CFMEU sponsors. The CFMEU is an embarrassment to Andrews but he can't do anything about it. And CFMEU supporters are becoming more brazen than ever; so much so that only a few days ago, the Melbourne Herald Sun reported that "Underworld figure Mick Gatto has told Opposition Leader Daniel Andrews not to break links with controversial CFMEU John Setka". When a political figure is getting advice from people like Gatto it's obvious Labor has a big problem with its choice of mates.

Andrews has said that a CFMEU member will be the new Planning, Major Projects and Infrastructure Minister. Mr Andrews sees no conflict of interest in his Minister's close association with the CFMEU despite the fact that the CFMEU is inextricably involved in his portfolio. Or maybe he has been told to turn a blind eye. Or maybe he is too weak to stand up to the CFMEU. Either way his position is scandalous.

In addition, Labor has publicly confirmed that it will break existing contracts for the East West road project despite the fact that the proposal has strong public support (around 60 per cent in recent polls). The combination of CFMEU cabinet influence and a diminution of Victoria's reputation on sovereign risk will be a blow to Victoria.

The third risk of a Labor government is that it would be a big spender as were the recent Labor governments of Steve Bracks and John Brumby. The facts speak for themselves, as reported by the Menzies Research Centre using ABS and other publicly available data.

Under Bracks and Brumby, the number of public sector employees grew by 52.4 per cent compared to the population increase of 16.7 per cent. By comparison, Labor governments in NSW from Carr to Keneally increased the public sector by 25.69 per cent.

Over the same Labor period, the average annual increases in wages were 7.7 per cent for Victoria and 6.2 per cent for NSW under Labor. By comparison, wage growth with Coalition governments was 3.3 per cent under Greiner, Kennett wages expenditure actually fell by 1.7 per cent and the John Howard increase was a mere 0.6 per cent.

And if you thought that the extra public sector workers were there to boost front line services, you would be wrong. From 2001 to 2007, when Labor was running nearly all the state governments, the ABS classification of "government administration" increased by 8.5 per cent compared to education (2.5 per cent) and 2.3 per cent for health and community services.

Victorian Labor has become too close to the CFMEU and tearing up contracts cannot be acceptable for either Liberal or Labor voters in NSW or Victoria. If Victorian Labor loses, on these two issues particularly, they will deserve what they get.

Tuesday, 18 November 2014

Well done to everybody for the G20 show. Tony Abbott did a good job showcasing Australia to the biggest gathering of world leaders most of us will ever see. I don't want to be a wet blanket, but while the G20 is important it's also a lot of huff and puff.

It won't win many votes in the next election. And it won't fix our budget problems.

The trade deal with China is altogether a different matter. It will create more jobs and investments. It will ensure Andrew Robb is credited as one of the best trade ministers and put a damper on protectionist elements within the coalition. And Tony Abbott deserves credit for giving the trade portfolio to an urban, economically literate Liberal.

More sales of cattle and dairy products will be a boost to rural Australia and the enhanced access for the service sector could end up as being a bonanza for our economy. And the extra trade will be a shot in the arm economically just as the 2016 election comes onto the political horizon.

Meanwhile, back at home the prospects of securing significant expenditure restraint are gloomy. For various reasons, cutting expenditure was not John Howard's forte but nor was it for Margaret Thatcher or Ronald Reagan. In all three cases they were at their best in making the economic cake bigger.

For the Commonwealth and the states, two areas of spending that can produce savings without too much political angst can be found in contracting out services and removing duplication of government functions.

Contracting out is not new and readily available to federal and state governments acting unilaterally. The difference with removing duplication is that both levels of government need to work together. All you need is a minister who wants to get things done. I found one such minister last Friday at the launch of the Hawkesbury campaign for Dom Perrottet, the NSW Minister for Finance.

Perrottet spoke with commitment and conviction about his reform agenda in NSW. Aged 32, Dom has been a minister for only six months and already he is one MP to watch in the future. You only have to hear him speak to realise that he is clearly every bit as good as some of the better federal MPs.

The only difference is that federal MPs start their federal career certain that the federal parliament is superior to state politics. More often than not, candidates see the federal parliament as more exciting, more interesting and more important. And that attitude becomes a barrier to removing state and federal duplication because federal MPs are too inclined to hang on to state functions because federal MPs think they are better government managers than their state colleagues. The consequent reluctance to give up control is the reason I fear that the Abbott government's proposed White Paper will not lead to the cuts in duplication that are needed not just for efficiency but for savings.

Having first been a councillor in rural Victoria, I then stood for office in a state seat and would have been very happy if I'd won preselection. My experience is that state and federal governments are more different as a result of their differing functions as much as anything else. I was very involved in starting a private community school. Who is more important; the federal minister who helped fund the school or the state minister who gave us a spare class room? The answer is that it is nonsense to say one is more important than the other.

There is no question that the reform of federal state relations is well overdue. But if the Commonwealth Government is fair dinkum, rather than waiting for its white paper, it should start with some decisive action to demonstrate that it is determined to reform federal state relations. Why wait when there are some obvious reforms needed now? Two issues come to mind: cutting duplication and fixing the GST split.

The current GST arrangement rewards states that are doing poorly and punishes the more economically successful states. Instead, the GST should be split equally and if the Commonwealth wants to top up the mendicant states of Tasmania and South Australia then that should be a federal responsibility. This measure alone would galvanise federal/state relations.

The Commonwealth does not run any schools so the current bureaucracy in the federal education department should be closed altogether. Additionally, the government should reconsider its position on the national curriculum which is a recent addition of Commonwealth meddling and duplicating. The states run education and the feds are cutting funds anyway so why have the federal minister calling the shots?

It has been a good week for Australia but the government needs to build its momentum with a lot more reform, including federal state relations.

Monday, 10 November 2014

There is little reason for Australia to fund a new multinational government-owned bank. Not only would the Asian Infrastructure Investment Bank (AIIB), proposed by China, be expensive at a time when budget funds are limited, but it would be contrary to our basic policy of supporting the private banking sector.

So far, 21 Asian region countries have signed a Memorandum of Understanding to establish the AIIB but no one knows the details except that the Chinese like the European Investment Bank (EIB) model. The Chinese should think again about their model. Having spent six years as the Australian representative at the European Bank for Reconstruction and Development (EBRD) and having watched the EIB at close range, Australia should not be involved of either of them.

Apparently, Australia was about to agree to our involvement in the AIIB but the Cabinet decided against the proposal after pressure from the US. But that may not be the end of the matter.

Australia is already a member of the Asian Development Bank and the EBRD. At one point, I persuaded Treasurer Wayne Swan to sell our shares in the EBRD because the bank had done its job. However, he was overruled by Kevin Rudd, who thought we needed to keep our shareholding to help us win a seat on the UN Security Council. Rudd also wanted Australia to join the African Development Bank (AfDB) but eventually the Coalition wisely dropped that idea. Needless to say, Australia got onto the Security Council regardless of the AfDB, which proved that retaining our shares in the EBRD was also unnecessary.

The EIB is a classic example of how multinational banks are run by the staff for the staff, with very generous remuneration, minimal accountability to taxpayers and a determination to build its own empire.

Originally the EIB was established to fund projects in poor countries like Italy as a quid pro quo for the Italians and others to join the European Union. However, contrary to the original intentions, bigger economies like Germany and the UK gained more and more of the funds. EIB funding in the UK economy in 2013 was €5.8 billion($8.4 billion), with €7.8 billion for France and €7.45 billion for Germany.

The EIB is also not alone in breaching its mandate.

The EBRD was established to support those countries previously behind the iron curtain. The mandate was to promote the private sector and democracy, and not to compete with private banks. Today, the EBRD regularly lends money to Russia.Russia is not democratic, it has no qualms in funding oligarchs, it does not run a free market economy, and to add insult to injury it waged war against Ukraine and its actions led to the loss of many Australian lives. Egypt is another example of a broken mandate. Egypt was never behind the iron curtain, but it is now a beneficiary of the EBRD, it's not democratic either and it has an Australian journalist in jail on trumped up charges.

I spent six years with the EBRD. The bank was largely run by the French and the Germans, who had about 8 per cent each. The biggest shareholder was the United States with 10 per cent, but even the Americans were regularly ignored by the Europeans. The Board of the EBRD is more like a meeting of the United Nations than a meeting of a bank: it has more than 40 directors and alternates. Many of the directors are on a tax-free merry go round with pensions from the bank as well as their ministry. For many, the gravy train starts at the EBRD for three years, then a few years at the EIB, then one or two of the other banks and then return to the EBRD as an executive director. Accountability is weak: too often decisions are made by political compromise and in breach of the mandate. In my six years at the EBRD, there was not one case where the board was able to overrule a staff recommendation.

The AIIB would be capitalised at about $US50 billion ($58 billion). I surmise that participants would put in about $US10 billion; we would get about 5 per cent of the shares and would be liable to be called for the rest. Our upfront cost would therefore be about $500 million.

I hope that the government does not change its mind on the AIIB. But if it does change, it should ensure that our money is not just gobbled up and never seen again and never acknowledged. To achieve at least something, the government should demand that the AIIB pay an annual dividend, demand commercial rates on loans, commit to not competing with private banks and provide that any government can sell its shares at any time on the open market.

Tuesday, 4 November 2014

A good speech might lift expectations of reform but expectations not fulfilled are always a letdown. Remember Kevin Rudd? And given that there is no suggestion that Prime Minister Tony Abbott yet knows what reforms he wants to take to the next election, his Tenterfield speech is more likely to be a disappointment than anything else.

Big reform does not start with just one speech. It should start with strategy, policy, consultation, tactics, advice and many late nights, all behind closed doors and over time. Looking back on Fightback, I suppose Hewson and I had a touch of "crazy brave" but heck, why be in politics if you don't do what's worth doing? So in that sense, good luck to Tony Abbott. But is a bigger GST worth the trouble?

We are now encouraged to think that the formerly risk averse Abbott agenda will soon have a touch of the "crazy brave" and will include reform of the federation, tax reform, more budget cuts, pension reforms and labour market reform. It sounds ambitious but so far his economic reform agenda is limited.

Let's start with the politics.

No PM should start a big debate like the GST without lining up the support of his colleagues.

I sense that Abbott lit the match on the GST without a Cabinet meeting. Unfortunately Abbott has a penchant for unilateral decision making. It is true that Howard went solo on opening the 1998 GST debate but Howard did not act unilaterally. The GST was discussed many times in the cabinet and beyond well before Howard raised the issue and Howard had key ministers urging him on.

And a big issue like this is not just for the front bench.

In the days after the Abbott speech, MPs I spoke to knew nothing of the GST except what they read in the paper. Abbott owes it to his backbenchers and especially the marginal seat holders to talk to them before he goes to the media and puts their seats at risk. Abbott obviously thinks he could win a GST election because the Coalition won the GST election in 1998. But in 1993 we failed to win government and in 1998 the Coalition lost many seats because of the GST. We offered income tax cuts on both occasions and still we lost votes. The New Zealand experience (very similar to what Abbott may propose) was that the Kiwis were much angrier with their first small increase of the GST than they were with the initial introduction of their 10 per cent.

The political circumstances surrounding the GST are not as good as 1998. The 1998 campaign had the benefit that many of the 1998 campaigners were also in the 1993 campaign. The 1998 campaign also had a strong team. Howard and Costello were good salesmen, their first budget was a success and by the time of the 1998 election the government had proven its reform credentials through big items like fixing the waterfront. Howard also had a lot of political momentum from business, including small business, in support of abolishing the wholesale sales tax. Business collected the GST but they got the money back thereby reducing the cost of doing business. The narrative in 1998 was crystal clear. What would be the message for 2016? Of course, the abolition of payroll tax would be a good selling point but it would reduce revenues for the states and the GST would have to be pretty high. Sadly, I doubt it will have many supporters.

The 1998 reforms gathered most of the benefits of a value added tax. A few extra percentage points would not be that significant. Without a clear justification for a tax increase, the public would quickly see the GST as just another revenue increase.

Even if reduced income tax rates were persuasive (which I doubt), the broadening of the GST base could be pretty lethal in an election campaign.

Adding health and education would be problematic. The result would be a lot of churning rather than a lot more revenue. An anti-GST campaign would be unhelpful just as the new tertiary funding arrangements are implemented. Food could be taxed but the two previous attempts to include food have been thrown out in the Senate.

In reality, the rationale to change the GST base is limited. Australia has an internationally, efficient, modern GST. The GST's 58 per cent coverage of household consumption is similar to other advanced economies. Yes, New Zealand has the purest GST of any country but they ended up with a voter backlash that produced proportional representation in their unilateral parliament.

Any increase of the GST would be a huge fight; it is just about certain it would lose seats for the Coalition and be a major barrier for the return of the Abbott government.